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“Pricing can lead to massive sales (and massive anxiety). Here’s how to do it!”
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Let’s Talk About Pricing Strategy

Most entrepreneurs never think too much about their pricing strategy. They might take a peek at a similar product from a competitor, adjust the price by a couple dollars, and joila – the product is ready for sale.

But in the classic business world, pricing was an art form. Pricing gurus at major companies obsessed over finding the perfect price to maximize profit from a given product or service.

In other words, that Gillette razor is priced the way it is for a reason. Not because it makes the most sense for the consumer, but because it maximizes shareholder value.

So, keep in mind that a pricing conversation is really about how you will get the most value from the product or service you decide to sell. Thankfully, independent business owners don’t have shareholders, so we can also take into account things like doing what’s right for the customer.

Price Elasticity of Demand

While we’re not crazy about business school terms, we wouldn’t be doing our jobs if we skipped over price elasticity of demand in this conversation about pricing.

All you really need to know about price elasticity is this: if all else remains equal, demand for your product or service will decrease with an increase in price.

As an example, imagine this: you can sell 100 units of a $100 dollar product to your current audience. If you increase the price to $105, you are able to sell 95 units. Your costs are $20 per unit. Should you sell at $105 or $100?

The answer: $105. Why? Because you’ll earn $8,075 profit as compared to $8,000 at $100 per unit.

Great. That’s all the theory you need to know. When price increases, demand goes down. There is an optimal pricing level you can reach to make the most money from your thing. Capiche?

8 Pricing Strategies to Help You Price Your Digital or Physical Product, Service, or Workshop

Elasticity is great in theory, but it doesn’t tell us anything about where to start with your pricing strategy. Instead, let’s talk about some of the most common methods for pricing:

Cost-plus Pricing – Cost-plus pricing is an effective way to build a profit margin directly into the price of your product or service. It’s just what it sounds like: you calculate the cost to deliver a product or service (cost) and then add a 10% margin, for example (plus). Cost-plus is straightforward for the entrepreneur, but doesn’t take into account the mindset of the customer. You may also leave money on the table by focusing on cost.

Competitive Pricing – Competitive pricing focuses neither on costs or customers. Instead, competitive pricing is all about the existing market for your product or service. In competitive pricing, your job is to research the pricing strategies of many competitors to establish a pricing range. The range should have a high end and a low end, and the price of your product or service should fall somewhere between those bookends so that it is competitive.

Luxury Pricing – Luxury pricing is a classic strategy used by brands like Louis Vuitton, Mercedes, and Rolex. The price has more to do with the aspirations and image of the person making the purchase than anything else. By buying a product or service at a luxury price, we are buying our way into a club. That club is a representation of how we want others to see us in the world.

Rate-based Pricing – Also known as hourly pricing. Freelancers, consultants, and coaches most commonly use rate-based pricing for their services. The downside is that you have to trade time for money. The upside is that you’re guaranteed to get paid for every hour of work. Clients are sometimes hesitant about hourly pricing because they fear the incentive is to work more hours to make more money as opposed to being efficient.

Project-based Pricing – Project-based pricing is a flat fee arrangement agreed to at the outset of a project. The entrepreneur may make an estimate of how many hours she thinks the project will take and then price accordingly. Or, she may combine this strategy with some of the upcoming pricing strategies to charge more. The incentive is to finish the work quickly and with high quality. For this to work well, the scope of work should be well defined up front.

Value-based Pricing – Value-based pricing takes into account two key questions: 1) Can they pay?; 2) Will they pay? They are the customers, which makes value-based pricing a customer-centered approach to pricing. The determinant factor in this pricing strategy is how much your customers are willing to pay, rather than how much a product or service costs to produce or deliver. There is huge upside for the entrepreneur when value-based pricing is used well.

Tiered Pricing – A tiered pricing strategy gives consumers the option of choosing between different versions of the same product or service. For example, imagine considering a single gear bike for $299, a three-gear bike for $399, and a seven-gear bike for $499. A tiered pricing strategy turns a yes or no decision into an either or decision for the potential customer. It also provides a price anchor (as a consumer, I can convince myself I am being frugal by spending $299 on the single gear bike as compared to $499 on the seven-gear).

Pay What You Want Pricing – Also known as a donation-based pricing strategy, pay what you want pricing allows the customer to make the decision on how much the product or service is worth to her. Pay what you want allows you to test market demand without knowing the price elasticity for your thing. When combined with a “suggested price,” a pay what you want pricing strategy can sometimes lead to more profit than a set price.

As you read through the eight pricing strategies, you might have noticed something… These pricing strategies are not mutually exclusive. And, in fact, they are not.

Many of the pricing strategies can be used together to create the best outcome for your business and your customers.

Now that you have an arsenal of pricing options available to you, let’s get into the specifics of how to apply them.

Digital Products

For digital products, pricing strategies range widely. From $.99 books on Amazon to $2,000 courses, digital products truly run the gamut. Your price should be a reflection of your industry, your customers, and the value provided through your product or service.

Physical Products

Unlike digital products, there are hard costs (other than time and energy) to producing a physicial good. While services like drop shipping, print-on-demand, and 3D printing are helping drive costs down, the physical product world is still very unique. It’s important to keep in mind unit economics when it comes to pricing physical products: if you lose money selling one product, you’ll lose more money with every successive sale.

Services

Pricing services can be challenging, as so much of the value comes from your personal ability to deliver. Customers like to see things like testimonials, portfolios, and case studies of your work before they’re even willing to consider hiring you. While price is important, make sure you don’t disqualify yourself by keeping necessary information from your customers. Additionally, “productizing” your services can be a great way to help customers understand exactly what you can do for them.

Live Events

Like services, workshops and live events are highly dependent on the speakers or workshop leaders to deliver value. The experience of the attendee can vary greatly from session to session. Setting clear expectations up front helps frame the value of the event so that a potential attendee is ready to consider the price you’ve set for the ticket.

Pricing Strategy Matters, But a Great Product or Service Matters More

Hopefully this gives you a great overview of the pricing strategies available to you, and the ways you can use them to help price different kinds of products and services.

But if you take one thing away from this podcast episode and article, let it be this: no matter how well you price your product or service, nothing can make up for the importance of having a truly great product or service.

Your customers will tell you whether you have a great product. Make sure you listen.

If you want to learn more about pricing strategies, be sure to check out the show notes below!

The Top 10 Mistakes in Online Business

Every week we talk with entrepreneurs. We talk about what’s working and what isn’t. We talk about successes and failures. We spend time with complete newbies, seasoned veterans, and everything in between.

One topic that comes up over and over again with both groups is mistakes made in starting businesses. Newbies love to learn about mistakes so they can avoid them. Veterans love to talk about what they wish they had known when starting out.

These conversations have been fascinating, so we compiled a list of the 10 mistakes we hear most often into a nifty lil' guide.

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